The greenback relinquished some of its earlier gains against the majors in New York afternoon trading, giving back the 1.55-level versus the euro and 1.97 against the sterling. The dollar rallied initially on a stronger than expected April non-manufacturing ISM, which climbed back into expansion territory at 52 - its highest reading since December and beating calls for a deterioration to 49.1 from 49.6 in March. The employment index improved to 50.8 in April, up considerably from March at 46.9, while the business activity index eased to 50.9, versus 52.2 a month earlier.

While last week's better than expected US jobs report has tempered expectations for a June Fed rate cut, the economy still remains weak and has yet to bottom out. Further, the policy statement given by the FOMC provided little indication that the current easing cycle was over. Nonetheless, we look for the Fed to remain on hold at 2% for the remainder of the year. Economic reports slated for release this week include Q1 productivity, Q1 labor cost, March pending home sales, and weekly jobless claims.

Central Banks in Focus

Central bank policy decisions will garner market attention this week, with the Reserve Bank of Australia, European Central Bank, and the Bank of England. We do not expect any changes in policy decisions this week but anticipate the RBA and ECB to maintain their hawkish biases.

The RBA will announce its policy decision later this evening and is seen keeping rates unchanged at 7.25%. Australia's jobs data is also set for release, with the unemployment rate seen unchanged at 4.1% in April and employment down to 10k from 14.8k a month earlier.

The ECB and BoE will be announcing their rate decisions early Thursday morning. The BoE is not seen changing rates, instead remaining on hold at 5.0%. As is customary when the BoE stands pat, no policy statement is expected. The ECB is also expected to leave policy unchanged at 4.0%. However, we expect Bank President Trichet to maintain his hawkish tone in the subsequent press conference.